Contrarian Ideas at Fidelity Growth & Income

Editor's note: This is part of a continuing series of articles looking at the 20 biggest no-load stock funds.

In Tim Cohen’s world, bad news is often good news. “I like to look for bad news in the newspapers and on Wall Street for potential ideas,” says Cohen, who took over Fidelity Growth & Income in October 2005 after generating four years of stellar results at Fidelity Export & Multinational. One of Growth & Income’s top holdings is Home Depot (symbol HD), which Cohen thinks investors have beaten down below its true value. "A lot of people are afraid to own anything related to housing," he says. "But in my opinion, this is where some of the best values in the market are now."

Cohen is a buy-and-hold investor who favors companies that pay dividends and generate plenty of free cash flow. Beyond that, he invests wherever he finds the best opportunities. At present, that includes many blue-chip growth companies, such as eBay (EBAY) and Google (GOOG). "For every stock I look at, I think what will it will do in the next three to four years and if I can get 50% to 100% appreciation," Cohen says. Although he generally invests with the idea of holding companies "indefinitely," Cohen doesn’t always gravitate to long-term stories. "Sometimes bad companies offer exceptional upside without much risk," he says.

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The fund invests 10% to 15% of assets in foreign companies. These are what Cohen describes as "best in class" companies in global industries. "It’s never a call on a specific country," he says. "Bottom-up stock-picking tends to lead me to the best stories located outside of the U.S." At last report, Growth & Income’s foreign holdings include Swiss pharmaceutical giant Roche and Irish biotechnology firm Elan.

Cohen’s bets on such stocks as Home Depot and eBay have led to sluggish results so far. Growth & Income’s 9% return over the past year trails that of the S&P 500 by five percentage points. Although Cohen is one of Fidelity’s rising stars, we’d prefer to see a longer record at Growth & Income before endorsing the fund. Current investors should HOLD it.